Dive Brief:
- As cities ramp up their investment in local infrastructure in 2024, state and local bond sales are expected to reach about $400 billion, up about 7% from 2023, according to Peter DeGroot, a JP Morgan managing director and head of municipal research and strategies. DeGroot spoke at a Dec. 14 webinar hosted by the bond insurer Build America Mutual and the National League of Cities.
- Municipal bonds typically are the source of more than 70% of state and local financing for infrastructure projects, such as road repairs, sewer system maintenance and school construction.
- Despite that expected growth, interest rate trends, investor demand and the 2024 elections could all impact the municipal bond market, webinar speakers said.
Dive Insight:
“Municipal bonds are the crucial financing tools for cities,” said Michael Stanton, Build America Mutual’s head of corporate strategy and communications. “Without the municipal bond market, city leaders [would] have much more constrained fiscal decision-making and much less of an ability to invest in the projects residents and stakeholders need.”
State and local governments spent about $2.7 trillion on public construction between 2014 and 2022, with more than $2 trillion coming from new-money municipal bond sales, according to Build America Mutual. Yet while these sales had been steadily increasing over the past decade, they fell slightly in 2022 and 2023, Stanton said.
Even so, Stanton expects that municipal bonds will continue to serve as a reliable source of revenue for cities going forward, for a few reasons. First, he said, voters typically support capital investment projects. Second, states and localities can use municipal bonds to raise matching funds to unlock federal grants allocated through the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. Further, DeGroot said the Federal Reserve’s signal that it will cut interest rates this year would mean a “strong reception” for the municipal bond market.
“The expectation is that there will be ample opportunity for cities to be able to issue debt in the municipal bond market, and they'll come at very attractive yields relative to what we're seeing in the current year borrowing,” DeGroot said.
However, city leaders may also face some bond-related challenges in 2024. Even with cuts potentially on the way, relatively high interest rates mean local officials may need to put more effort into attracting investors and keeping costs down. Broader economic trends, including slower job growth and rising unemployment, could also affect the market. The bond market will also likely be tighter in the last few months of the year, DeGroot said.
“We think that the market is particularly fertile around that January/February period, and again in the summer,” DeGroot said. “If you were planning an issuance in the municipal bond market, a period of the year to maybe draw a red pen around is that September/October period [because] there is a relatively small amount of investor capital … relative to the amount of issuance we’re expecting in the market.”
Stanton recommended that city leaders closely monitor political candidates’ proposals ahead of the 2024 elections, given the next Congress could limit or eliminate the federal tax exemption for municipal bonds. Interest payments on municipal bonds are typically tax-exempt, which helps to drive demand, Stanton said.
